Policies to Reduce Unemployment

A
range of government policies are available for Governments wanting to reduce
the scale of unemployment in the economy. These policies need to focus on the
underlying causes of unemployment for them to be successful.

·Real Wage

·Keynesian

·Structural

·Frictional

Real
Wage Unemployment

Prescriptions
for reducing real wage unemployment normally focus around the strategy of
making each labour market more flexible so that pay conditions become more
adaptable to changing demand and supply conditions. Real wages should rise
when demand, output and employment and rising, but they may need to fall if
an industry experiences recession which puts jobs at threat. The UK economy
has developed a flexible labour market model similar to that of the United
States during the last fifteen years.

Trade
Union reforms were a centre-piece of the Conservative Government's strategy
to improve the performance of the labour market. The Labour Party under Tony
Blair has not reversed these reforms since coming to office, although some
new legislation has been introduced to give workers the right to achieve
union recognition. A National Minimum Wage has also been introduced.

Keynesian
Unemployment

Policies
to reduce Keynesian demand-deficient unemployment need to raise the level of
aggregate demand for goods and services in the economy. A number of options
are available.

Increased
Government Expenditure

The
Government can raise the level of its own spending. This "fiscal
pump-priming" directly increases aggregate demand and can have a
multiplier effect on equilibrium national income. The government could raise
current expenditure (for example raising pay levels in education and the
health service) or expand spending on capital projects which add to the stock
of capital (for example spending on new roads, new hospitals or other major
infrastructural projects).Sustained
economic growth provides a platform for more jobs to be created in the
economy.

Lower
Taxation

A
reduction in direct taxation increases consumers' disposable income and
should boost household spending. The effect may be greater if taxes are cut
for people on lower than average incomes. These tax-payers are likely to
spend a greater percentage of their disposable income.

Lower
interest rates

A
relaxation of monetary policy through lower interest rates encourages the
demand for credit, reduces saving and increases consumers' real 'effective'
disposable incomes; all of which will boost consumption and demand. It may
also encourage firms to invest, as the marginal cost of investment will fall.
Remember that interest rates are not set by the government. The Bank
of England now sets interest rates each month at the meetings of the Monetary
Policy Committee.

Depreciation
of the exchange rate

A
lower value for the pound should lead to a rise in the orders of exports from
UK firms and to a reduction of import penetration by making exports cheaper
and imports more expensive.

Remember
the importance of time lags!

Government
policies to stimulate increased aggregate demand for domestic output take
time to have their effect. There are variable time lags between the
government reflating the economy using fiscal and or monetary policy and the
final effect on output and employment in specific industries.

Structural
Unemployment

There are
a number of different approaches that can be adopted to help alleviate
structural unemployment. These are sometimes known as active labour market
policies. The first involves direct government action to match jobs to the
unemployed.

Regional
policy incentives

Gives
grants and subsidies to firms to locate in areas of high unemployment.
However, this does not solve the problem of occupational immobility. Often
regional policy requires extra retraining schemes to give workers the
relevant skills to allow them to take up new jobs.

Investment
in worker training

Spending
on training schemes to re-skill the unemployed through investment in
vocational education or guaranteed work experience for unemployed
"outsiders" in the labour market.

Improving
geographical mobility of labour

The
government could provide grants or low cost housing to encourage workers to
move to other regions where there are jobs. The problem with this policy is
that people are inherently immobile as they are often bound by family and
social ties.

Market
solution - no need for government to get involved!

One
approach is to simply leave the problem of structural unemployment to the
market. Some economists argue that intervention slows the natural
reallocation of resources to high growth areas and only makes the problem
worse. In areas of above average unemployment it may make some sense to allow
wage levels to fall to attract new capital into an area.

The
implementation of the Job Seeker's Allowance in 1996 ensures that workers are
actively seeking work as the payment of benefit is dependent on them proving
this at fortnightly interviews.

However,
if the government reduced the real value of unemployment benefits, or limited
the duration of a claim, search times between jobs could be reduced even
further as workers would have to quickly take on new positions before their
financial situations deteriorated.

Better
information on job vacancies in the labour market can help to reduce job
search.

Cuts
in direct taxes

The
government could reduce direct taxes for the low paid to increase the post
tax wage and, therefore, encourage them to find work more quickly. The Labour
Government is introducing a 10% starting rate of tax to encourage more low
income groups back into work.

Most
analysts believe that tax cuts on their own are insufficient to reduce
frictional unemployment. Complementary reforms to the benefits system to
reduce the problem of the poverty trap may also be needed.